Sustainability disclosure mandates for businesses in the UK and EU
EU – Corporate Sustainability Due Diligence Directive (CSDDD)
The Corporate Sustainability Due Diligence Directive (CSDDD) requires both EU and non-EU companies to perform environmental and human rights due diligence throughout their operations, subsidiaries and value chains. In December 2023, the EU Council and Parliament agreed on a provisional agreement for the Directive. The CSDDD is anticipated to come into force in the first quarter of 2024.Under the proposed regulations, companies must identify potential and actual adverse environmental and human rights impacts stemming from their operations, subsidiaries and business relationships. It will be mandatory for companies to take preventive or mitigative measures for potential impacts and to cease or minimise actual impacts. In the event of non-compliance, individuals can seek compensation in a European court for harm resulting from human rights or environmental standards violations. Moreover, national supervisory bodies will have the authority to penalise companies for inadequate implementation of due diligence procedures. These penalties may reach up to 5% of a company’s worldwide turnover. The Directive applies to companies with more than 500 employees and a global annual turnover exceeding €150m. Certain risk sectors, such as textiles, agriculture, food manufacturing, mineral resource trade and construction, have a lower threshold of more than 250 employees and a turnover above €40m, with at least €20m generated in one of these sectors. Furthermore, the Directive encompasses all companies active in the EU market, irrespective of their HQ’s location. The JURI committee in the European Parliament is set to vote on the EU Commission’s proposal to shift the deadline for sector-specific standards under the Directive from June 2024 to 2026 this week. The EU Commission deprioritised technical work on sector-specific standards last year. Business have expressed their support for the timely development of these standards, aligning with industry-wide recommendations and analysis.
Looking at smaller businesses and how corporate regulations will impact supply chains – of these, the EU’s CSDDD is the one to watch, and what the UK does in response to, as it drives environmental and social monitoring and action across value chains (“chain of activities”) – so including SME activity. This is exactly what we’re looking to achieve with the Business Impact Tracker, allowing a way to monitor and request improvement in critical areas. We like the CSDDD approach as its less about the reporting and more about corporate practices and responsibility. And as with most of the EU regulation, we can expect a similar regulatory drive to follow here in the UK, though this may take the form of enhanced existing supplier due diligence practices.
The other area to watch is the upcoming UK SDS (Sustainability Disclosure Standards) which will align the ISSB frameworks across reporting for listed and unlisted companies in the UK, as part of the UK SDR regime (see below) which is more advanced at this stage.
UK – The Financial Conduct Authority’s Sustainability Disclosure Requirements (SDR)
The UK’s Financial Conduct Authority (FCA) last year confirmed new disclosure requirements for all companies within its remit, intended to enhance the provision of information on how funds with ‘sustainability’ or ‘ESG’ labels are invested. The investment labelling and marketing rules came into effect from 2 December 2023. This will prevent asset managers from using vague terms in marketing – instead, they have to choose one of four labels and disclose information proving that at least 70% of the fund is allocated to support its label. For example, 70% of ‘Sustainability Impact’ funds have to back projects with “positive, measurable impact in relation to an environmental and/or social impact” – and their fund managers will need to prove that in reports to the FCA.
EU – Corporate Sustainability Directive (CSRD) and European Sustainability Reporting Standards (ESRS)
The Corporate Sustainability Reporting Directive (CSRD) is the EU’s new overarching reporting mandate, set to replace the current Non-Financial Reporting Directive (NFRD). It aims to significantly increase transparency in the field of corporate sustainability. The CSRD came into force on 5 January 2023 and reporting for businesses covered under the NFRD commenced on 1 January 2024. It will expand to cover other large businesses from 1 January 2025. The Directive extends sustainability reporting requirements in the EU from 11,000 to about 50,000 companies. The reporting is phased, starting with Phase 1 targeting public interest companies covered by the NFRD with specific criteria such as €25m in assets, a net turnover exceeding €50m, or more than 500 employees. In Phase 2, large EU companies meeting criteria such as €25m in assets, a net turnover of more than €50m, or more than 250 employees are included. Phase 3 focuses on SMEs, excluding microenterprises, small credit institutions and captive reinsurance companies. Despite the CSRD being an EU initiative, non-EU companies are brought into Phase 4 if they have a significant presence in the EU, with criteria including an annual net revenue of at least €150m in the EU. While the CSRD serves as the mandate for sustainability reporting, the European Sustainability Reporting Standards (ESRS) offer detailed guidelines aligning with the Directive. The ESRS applies to all affected companies, featuring standards for environment, social and governance (ESG) categories based on the double materiality assessment. This includes climate change, pollution, water, biodiversity, ecosystems and the circular economy. Social standards cover workforce welfare, value chain workers, impacted communities and consumers. Under the ESRS, reporting extends beyond a company’s activities to include its value chain, necessitating disclosure of sustainability impacts, risks and opportunities for suppliers and customers.
Global – International Sustainability Standards Board
The International Sustainability Standards Board (ISSB) aims to unify disclosures from corporates in different countries and is developing standards covering a range of different environmental and social sustainability topics. If the former intends to be a ‘core baseline’ of corporate sustainability reporting and sets out the integration of data on emissions and waste into financial reports. The latter is more detailed and focuses on climate adaptation and mitigation. Both standards cover indirect (Scope 3) emissions. This year, a string of nations are expected to formally pledge support for the ISSB, following an initial show of support from regulators and standard setters across the world – primarily the
G20 – at the COP28 climate summit in Dubai last year. The UK and EU are both ISSB proponents and have stated an intention to align all future disclosure mandates with its work. Within the coming weeks, the ISSB is expected to set out which standards it intends to launch or fine-tune this year.
UK – Transition Plan Taskforce gold standard
Back in autumn 2021, the UK pledged to mandate corporate net-zero transition plans for the largest businesses in the highest-emitting sectors. Such plans set out how businesses intend to support the delivery of top-level decarbonisation targets with appropriate changes to strategy, such as the re-allocation of investment, changing product or service offerings, and upskilling or reskilling staff. To define what information businesses should be mandated to disclose, and which businesses should be effective, the Government commissioned a Transition Plan Taskforce (TPT) and gave the group a two-year operational remit. The TPT published its finalised ‘gold standard’ guidance last Autumn and recommended that the mandate apply to 40 different industries. Covid-19 and changes in Prime Minister impeded efforts to implement a mandate for gold-standard-aligned disclosures before the end of 2023 as originally promised. Legacy understands that the Government will take a decision on the mandate’s timeline before the next general election, which must be called by January 2025. Prime Minister Rishi Sunak has stated his intention to call the election in the latter half of 2024.
UK – Taskforce on Climate-related Financial Disclosures (TCFD)
The UK was the first country in the world to mandate corporate climate risk disclosures in line with the Taskforce on Climate-related Disclosures’ (TCFD) framework. This framework sets recommendations for appropriately ambitious climate mitigation, adaptation and risk management targets; water-tight climate governance and scenario-based preparation for potential risks in a warming world. Since April 2022, around 1,300 larger organisations have been covered by the UK TCFD mandate. It currently applies to all firms that are required to produce a non-financial information statement annually, most of which have 500 or more employees and/or annual turnovers exceeding £500m. Non-compliance with the existing mandate can result in fines of up to £50,000. The mandate’s remit was always intended to be expanded in 2025 to cover smaller businesses. Legacy understands that the UK Government intends to go ahead with this and will confirm specific details this year.
UK and EU – Taskforce on Nature-related Financial Disclosures (TNFD)
The TNFD framework is modelled on learnings from the TNFD’s recommendations and intends to unify corporate disclosures on nature-related impacts and risks across whole value chains. It was published, in its finalised form, in September 2023.Earlier this month at Davos, more than 300 businesses pledged to produce TNFD-aligned reports on a voluntary basis. Some are intending to do so with immediate effect; the changes should be visible in reports this financial year. Others will wait until 2025 data is available. Time will tell whether the UK builds on its TCFD mandate with TNFD requirements as well. As this is such a new framework, there are no publicly stated timeframes yet. But the UN’s Global Biodiversity Framework, to which the UK is a signatory along with more than 180 other nations, stipulates that backers should mandate corporate nature disclosures this decade. The EU is also a Framework signatory.
